When people make a bank account withdrawal that causes the account balance to go below zero, the account is considered overdrawn. In the UK, bank account holders can be pre-authorized for overdrafts to a certain limit. If the negative balance falls within the authorized limit, interest is charged on the shortfall. If the balance exceeds the limit, a higher interest rate and additional fees may be imposed.
Whether a basic overdraft feature is provided interest-free, is subject to an average monthly balance, or is subject to a separate lending rate varies by bank and type of account. An overdraft may occur for several reasons including negligent overspending or intentional withdrawal designed as a short-term loan.
ATM withdrawals and temporary holds on deposits and debit card transactions are other common causes.
If the withdrawal exceeds the authorized overdraft limit, it becomes an unauthorized overdraft. The bank typically issues a letter informing the account holder of the charges and fees and requesting future maintenance within the overdraft limit. All major UK banks charge some type of unauthorized overdraft fees.
However, some banks provide a buffer zone of a certain amount over the authorized overdraft limit. In this case, customers will not be charged any fees if they stay within this range.
The typical unauthorized overdraft fee is between 25 and 30 pounds plus an increased interest rate. If the individual is unable to repay the overdraft, fees and interest continue to accrue, increasing the negative balance. The bank will try to recoup the money from the account holder and if unsuccessful, will turn the issue over to a debt collector who will do the same.
The account may be frozen or closed and the individual could be taken to court and issued a County Court Judgment.
When the issue is turned over to a collector, the credit rating will also suffer, making it difficult to get a mortgage, auto loan, mobile phone, and additional credit. Even if the situation does not get to that point, mortgage lenders will see the fees when they review previous bank statements, causing them to question whether the individual is creditworthy.
If the bank account is closed, the individual may not be able to open another one for up to five years.
The most serious cases involve bailiffs and even the loss of the home. Therefore, account holders should address their overdrafts as quickly as possible. If they cannot immediately repay the full amount due, they should try to arrange a repayment schedule with the bank.
If the bank does not agree to this, alternative debt management solutions should be explored.
Free debt advice is available to UK residents who find themselves with overdrafts they cannot afford to repay. If the individual has other debts, counselors may recommend a formal solution such as a debt consolidation loan, debt management plan arranged by a third party, Individual Voluntary Arrangement, Administration Order, or Debt Relief Order.
Consumers should seek free guidance as soon as they find themselves unable to repay their overdrafts.